Lithuanian economy impressively sails against the wind

During Q1 this year, the Lithuanian economy was not stopped by unfavourable global winds – GDP growth remained rapid, reaching 3.9%. However, having an open economy, Lithuanian cannot ignore what is happening abroad. In recent months global trade contracted at the most rapid rate in a decade. Is this a temporary trend and will we see its consequences in Lithuania?

Lithuania is one of the most open economies in the world, which means that it is most dependent on import and export. However, considering many of Lithuania’s macroeconomic metrics, it would be hard to suspect that problems are accumulating in a number of Lithuania’s export markets.

In Q1 this year, Lithuania’s manufacturing without oil products was an entire 7.8% greater than the same period last year. The export of Lithuanian origin goods (other than oil products) rose by almost 13% in the first months of this year. While a nearly doubled cereal export contributed much to it, there was rapid increase in many industries’ goods exports.

Retail trade growth did not slow either, reaching 7% in Q1 this year. After the previous record-breaking year, the number of transactions in the housing market did not decline and continues to set records. Rapid retail trade growth and activity in the housing market is not surprising because there is no lack of jobs in Lithuania.

Less labour, higher wages

Quite the contrary – there is a lack of employees. Meanwhile, wage growth after tax looks to be on course to exceed 10% this year. Thus, the Lithuanian citizens’ confidence in economic and personal financial prospects is at the highest levels in a decade. The growth expectations in many economic sectors are also remaining close to historic highs.

However, at the same time, Eurozone industry confidence metrics have dropped to the lowest levels in five years. Are the Lithuanian people and companies’ calm and positive expectations rational? Yes, because most of Lithuania’s structural metrics show no basis for concern.

Even with rapid wage growth and the German industry is tanking, most Lithuanian economy and its goods and services exporters manage to not lose markets. The foreign trade surplus, where goods and services export exceed imports greatly, remains at record highs.

Furthermore, the government sector’s budget is surplus – state expenses are financed not from borrowed funds and the state debt is declining. The lessening cost of borrowing “frees up” tens of millions of euro every year, allowing to satisfy various public needs. The savings and reserves of citizens and companies continue to grow faster than debts, Hence they remain resistance to fluctuations in financial flows.

Pros and cons of openness

That said, economy’s openness creates not only great opportunities, but also vulnerability, which we unfortunately cannot control. The main reasons that had negative consequences for global trade so far were not economic. Unfortunately they are political and they have not gone anywhere so far.

Therefore, slower global trade growth is the consequence of last year’s protectionist policies. The USA set tariffs for half of Chinese import goods, renegotiated trade agreements with Canada and Mexico. In addition the USA applied new sanctions on Iran and reduced its capacity to export oil. Currently, the USA is mulling increased tariffs on EU import cars and many other goods.

It would appear that the negotiations between the USA and China are proceeding fine and in the near future. Hopefully we may see a ceasefire on the trade front – the beginnings of an agreement.

However, disagreements could prevent or later break it down given the hard to coordinate interests and deep-rooted confrontation between the world’s two most powerful economies. That said, in autumn this year, China’s Communist Party will commemorate its 70th anniversary, while the USA is beginning preparations for the 2020 presidential elections.

Thus, it is likely that greater economic conflicts and shocks may be avoided in the near future and the USA and especially China will continue monetary and fiscal measures to spur on their economies. However, the potential for political mistakes and unpleasant surprises remains heightened. The winds will remain unfavourable and we will have to sail under difficult conditions, N. Mačiulis wroteabout the status of the Lithuanian economy

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